The Housing Bubble

I say ‘last recession’ to suggest the possibility that the worlds governmetns and central banks have set up a Japan-like indefinite recession. Let’s look at some viewpoints. CBS Money Watch. “Hip hip, hooray for the U.S. economic recovery! Unemployment is down, consumer confidence is up and the ‘animal spirits’ that keep America Inc. hopping are finally reawakening. The Federal Reserve feels optimistic enough to have turned the page on the Great Recession earlier this month by raising interest rates for the first time since 2008. Phew, glad that’s over.”

“Or is it? Although most professional forecasters expect the U.S. economy next year to continue its slow trudge back to respectability, some experts see danger on the horizon. In a December report, Citi Research analysts put the probability of the U.S. entering a new recession — two consecutive quarters of shrinking economic growth — at 65 percent. That prediction is partly rooted in history. Looking at previous recessions in the U.S., U.K., Germany and Japan between 1970 and 2014, the bank found that the odds of a downturn cross 50 percent roughly five years into a recovery (see graph below). Notably, the U.S. is in year seven of its post-recession rebound.”

“Economist David Levy, chairman of The Jerome Levy Forecasting Center LLC, bluntly predicts that worsening global economic conditions in 2016 will pull the U.S. into a recession by the third quarter. ‘We’re really seeing emerging markets slowing a lot, with a few countries already in recession,’ he said, likening financial markets’ general apathy about the air whooshing out of these economies to the blinkered bullishness that prevailed in 2007 shortly before the U.S. housing bubble burst.”

“The main reason emerging economies are struggling, in a word: overcapacity.”

Dow Jones Business News. “Behind the biggest market meltdowns of 2015 were familiar culprits: central banks. And more volatility is likely to follow in 2016 as investors navigate the Federal Reserve’s gradual exit from easy- money policies after the U.S. central bank raised rates for the first time in nearly a decade. Rock-bottom interest rates and massive asset purchases designed to kick-start ailing economies have encouraged investors to push into ever-riskier assets in search of returns. That has left many markets vulnerable to sharp reversals when popular trades turn sour.”

“The tumultuous year has left many investors wary of the risks of placing too much faith in central banks. ‘Credibility, or rather confidence in central banks has diminished,’ said Jim Caron, global fixed income portfolio manager at Morgan Stanley Investment Management, which had $404 billion in assets under management at the end of September. ‘The consequence is that they may not be able to stabilize prices as effectively as they have in the past.’”

The Economic Times. “In the past 50 years, a global recession has on average hit once every eight years and lasted for about a year. However, with China’s debt still growing twice as fast as its economy, the next global recession could well bear the label ‘Made in China.’ The world economy is currently growing at its weakest pace since it began recovering in 2009, with global GDP growth for 2015 estimated at 2.5 per cent in real terms. But measured in nominal dollar terms, global GDP will likely contract by about 5 per cent this year. This would be just the third time that the global economy has shrunk in nominal GDP terms since 1980.”

“Much has changed since the global financial crisis of 2008. For the first time in recent history, an economy other than the US has emerged as the largest contributor to global growth, with China accounting for a third of the world’s growth, compared to a 17 per cent con tribution by the US. This is an exact role reversal by the two economies from the preceding decade. The contribution from the other giant economies, Europe and Japan, has fallen to less than 10 per cent.The key to global growth is now in Beijing’s hands.”

“The problem is that China’s recent economic rise has been facilitated by a massive and unsustainable stimulus campaign. No emerging nation has ever tacked on debt at such a furious pace as China has done since 2008, and a rapid increase in debt is the single most reliable predictor of future economic slowdowns and financial crises. Policymakers in Beijing have been trying to sustain an unrealistic and randomly selected growth target of 7 per cent by steering cheap loans into one bubble after another -first housing, and most recently the stock market -only to see each bubble collapse.”

“The China slowdown is hitting countries in the developing world the hardest. China is now the top export market for more than 40 developing countries, and that number is up fourfold since 2004. As 2015 draws to a close, the global economy is exhibiting few signs to suggest it is breaking out of a rut, with growth still stuck at around 2.5 per cent. With global recession defined as a growth rate of below 2 per cent, the world is just one shock away from drifting into recessionary territory. Another one or two-percentage point drop in debt-laden China’s growth rate could well deliver that jolt.”

This Is Money. “Robert Shiller may be a Nobel prize winner with an impeccable mathematics background but it is human behaviour and the real world which drives his thinking. He is a great believer in free markets but warns that the economic system ‘is filled with trickery’ and thinks everyone should know that. As a new year gets under way Shiller fears that advanced economies could be on the cusp of another stock market and property bubble that could end in tears.”

“Shiller is concerned that once again markets may be showing over-exuberance. ‘I’ve tried to inquire why we are having these booms right now at a time of so-called secular stagnation with low interest rates, and arrived at the thought that low interest rates are promoting these bubbles. Central banks caused them but that’s only part of the truth. There are other things happening that may contribute to a high stock market and a high housing market.’”

From Reuters. “The story of two Iowa cousins - one a retired teacher, the other a laid-off Deere & Co worker - shows who benefits, and who doesn’t, in the vast money-go-round powered by the chase for higher investment yields. The Iowa cousins’ Wall Street connection is a single, small strand in a vast web of massive financial flows, woven in the easy-money environment the U.S. Federal Reserve has maintained for years.”

“St. Louis, Missouri-based agrochemical giant Monsanto Co, for example, is caught in the same commodities downturn as Deere. It said in October that it would slash 2,600 jobs as commodity prices slump. But it has increased debt by $7 billion since 2013, helping to fund $8 billion in share buybacks in the same time frame. San Diego-based chip maker Qualcomm Inc said in July that it would cut 4,500 full-time staff, or 15 percent of its workforce, as foreign competition pinches sales. The company raised $11 billion in debt this year, helping to finance $11.25 billion in buybacks for the year.”

“And Atlanta-based beverage maker Coca-Cola Co said in January that it would cut at least 1,600 white-collar jobs as it faced sluggish soda sales. It has added $9 billion in debt since the end of 2013 and bought back $6.13 billion of its shares in that time. ‘Basically what you’re seeing in the stock market is a slow-motion leveraged buyout of the entire market,’ said Ed Yardeni, founder of Yardeni Research.”

“Matt Happel came to Deere after he got laid off from a local printing company during the depths of the last recession. He initially ruled out going back to school after Deere cut him, he said, because he knew it would mean at least two years of financial hardship — and he worried what that would do to his current relationship and his children. Deere for a decade was riding high on a global surge in commodities. Farmers from India to Iowa eagerly snapped up Deere’s machines — many of which can sell for $250,000 or more — as they rushed to meet the world’s growing demand for corn and soybeans. The company also makes construction and forestry equipment.”

“But that boom has gone bust as growth in China and other emerging economies cooled over the past several years. Deere said in January that it would cut more than 900 workers in Iowa and Illinois, including 565 in Waterloo, as it rushes to curb output. The layoffs came on top of 1,100 job cuts last year.”

“He still worries. His fiancée is an information technology specialist for an insurance company. A few days earlier, he said, she was called in for a meeting where the company announced cutbacks. Her job is safe, he said, ‘but it’s a scary thing.’ He paused for a moment, and then asked: ‘We’re not supposed to be in a recession now, are we?’”

What’s your housing bubble predictions for 2016? From analysts or economist? “Home values didn’t grow as fast in South Florida this year, but don’t worry about a housing hiccup in 2016. ‘We are not going to regress,’ said John Tuccillo, chief economist for the Florida Realtors trade group. ‘There’s not going to be a slump or a bubble burst. We have a nice, strong foundation.’”

“Jack McCabe, a Deerfield Beach housing consultant, said corporate and individual investors that bought homes after the housing crash and turned them into rentals will be ready to sell. He expects the increase in supply to flatten out prices and make the market more balanced between buyers and sellers. ‘I think 2016 will still be a good year for real estate, but I definitely think we’ll see some changes in the last half of the year,’ he said.”

For markets outside the US? “If 2015 goes down in history as a bad year for the Canadian economy, next year could be far worse. The national housing market watchdog – Canada Housing and Mortgage Corporation – recently determined oil staying in the mid-US$30s for a five-year period would not only end the country’s housing boom, it would actually cause a 26 percent price correction nationwide; with the particularly hot markets of Toronto and Vancouver taking an even more significant hit. Philip Cross, former chief economic analyst for Statistics Canada, considers that estimate to be ‘conservative.’”

“‘Last year we were looking at a sharp drop from which the industry could recover quickly enough,’ he said. ‘But now, we are looking at a sustained decline. …This could be painful.’”

From six months ago. “Denver will continue double digit rent and used house price increases for the next two years. Everybody wants to live in Denver.”

Another said, “I see more of the same in the housing market for the next six months with an eventual flattening in house prices. The longer term problem is the whole food chain issue - plankton (lower income buyers) buy cheaper houses, allowing move up buyers to move up. Right now, it seems like a lot of wealthy players driving the housing market, at least from media reports. And not so many plankton.”

“I think there will be without question a generational change in the attitude towards real estate as a path to riches. Peak debt was reached, the mortgage finance market was nationalized, and this seems to be the system going forward. But it was with the run up in debt that also sparked the runup in house prices. So, in the future, the experience of homeowners will be more ‘meh, it’s a lifestyle choice, better to raise kids in, but wait till you can afford it’ rather than the older generation telling their kids, ‘OMG you have to buy RIGHT NOW and AS MUCH AS YOU CAN because it’s only going to go up in price and inflation’s going to make it affordable eventually’ and that was exactly their experience. Plus they had affordable mortgages, before the evolution of the debt markets to their current go-go form.”

One year ago. “Interest rates stay in a holding pattern even as the fed ends qe. Treasury rates also stay in a holding pattern. Junk bonds fall as oil prices tank and a mini stock market turmoil develops as losses in junk bonds make some investors sell off their stocks. Some pension funds that carry these bonds fail. This might extend to those homes for rent funds but that may just be wishful thinking.”

“More small time flippers get tired of the work for less than the fancy returns they expected, sell their housing stock at a loss and get a real job. Rents stabilize and house prices stay in a holding pattern overall. More apartments built with wooden framing catch fire in California resulting in the government restoring the old requirement for steel framing for multistory buildings.”

“Getting roommates becomes more normal for more people in the Bay Area supporting high rents but allowing individuals to pay less than they had prior to the boom. Los Angeles silicon beach siphons tech workers from the Bay Area but sf continues to be the main draw with both businesses and housing concentrated in the city proper. The overvaluation/ bubble existing in preipo stocks like uber and lyft stay high but wait for 2016 when the need to start showing a profit becomes real.”

One had this, “The world economy is so messed up with excessive debt, the Fed will never raise rates in many many years.”

And another, “If I remember correctly, I predicted last year that little would change economically, at least from a housing standpoint; that we’d have the same stale and failed ideology from the same poor economic and political leadership. I think that’s the same for 2015 and even 2016. We can’t and won’t change voluntarily for the better. Period. We’re totally committed, to the point where I suspect that radical proposals would be seriously considered, or implemented, if the status quo were to be threatened by any event: eliminating paper money, negative interest rates for U.S. savers, and/or bank bail-ins.”

“Just in general, it pains me to see 2% annual inflation being sold by unelected central bankers as a positive thing to a country characterized by stagnant or falling wages for very large majority. I predict that will continue too.”

And finally, “Oil cannot be produced at these prices in sufficient quantity to meet demand. Spiking the dollar may keep oil and gold prices down for a while, the first six months of 2014 both rose until the manipulation began, however, it is going to have a major impact on multinational profits and it is very difficult to see how they can continue to spike the dollar without causing a recession in this country. What Obama is doing is just a little more sophisticated than Mugabe but in the end it is just trying to set prices by fiat. It did not work in the old Soviet Union or in Zimbabwe and it will not work now. We lost 35 rigs just last week, oil production instead of going up one million barrels per day in the US in 2015 may drop. In the end the physical market will prevail over the paper (futures market) despite the manipulation.”

“Prediction: $70 plus oil by the end of 2015 and gold over $1300.”

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